Wednesday, 18 January 2017

Peru amends transfer pricing rules

On 31 December 2016, Peru published Legislative Decree N° 1312 (Legislative Decree) amending the Peruvian transfer pricing (TP) reporting requirements by implementing the changes proposed by the Organisation for Economic Co-operation and Development (OECD) under the Base Erosion and Profit Shifting (BEPS) Action 13 final report. The Legislative Decree expands the TP documentation requirements by introducing an obligation to submit both a master file and a local file, as well as the implementation of Country-by-Country (CbC) reporting. The changes regarding submission of the local file will apply for the 2017 fiscal year, while the master file and CbC reporting are mandatory beginning with the 2018 fiscal year, provided that certain revenue thresholds are reached. Failure to comply with these obligations could result in penalties.
The Legislative Decree also introduces revised guidance for pricing cross-border commodity transactions. It provides that the comparable uncontrolled price (CUP) method is the most appropriate TP method for commodity transactions between associated enterprises using a quoted price as a reference to determine the arm’s-length price. In addition, it introduces general TP guidelines for intra-group services and, in particular, for services that qualify as “low value-adding intra-group services.”

TP documentation and CbC reporting
The new reporting requirements entail a three-tiered approach for TP documentation and CbC reporting, which aligns with the OECD BEPS Action 13 Final Report. The new reporting requirements include:

  • Local file: The local file documentation requirement applies only to taxpayers whose annual revenue for the fiscal year exceeds 2,300 Tax Units (approximately US$2.74 million). The first local file with information regarding related-party transactions and transactions with tax haven jurisdictions is required for fiscal year 2017.
  • Master file: Taxpayers that are members of a group whose annual revenue for the fiscal year exceeds 20,000 Tax Units (approximately US$23.82 million) will be required to submit a master file with high-level information of the group’s business operations and TP policies.
  • CbC report: Taxpayers that are members of a multinational enterprise (MNE) group will be required to annually file a CbC report that includes information on the revenue, taxes paid and business activities for each entity within the MNE group. The tax authorities (SUNAT) cannot rely on such information to propose TP adjustments without performing a detailed TP analysis of individual transactions.

In general, the master file, the local file and the CbC report should be translated to Spanish and kept for five years or during the statute of limitations period established by the Tax Code, whichever is longer. The information contained in these documents can be used by SUNAT for tax audit purposes and could be shared with other jurisdictions through the automatic exchange of information, under government-to-government mechanisms such as bilateral tax treaties or information exchange agreements.
Implementation of these new reporting requirements imposes a more extensive obligation to submit and prepare TP documentation. Overall, taxpayers must disclose more information.
Further guidance is expected to be included in future regulations on the form, information that could be requested as part of the new TP documentation requirements and the submission procedure.

TP aspects of cross-border commodity transactions
The Legislative Decree amends the TP rules for the treatment of import and export transactions between related parties of products for which a quoted price is used by independent parties to set prices (commodities). The new rules also apply to commodity transactions carried out by Peruvian taxpayers from, to or through tax haven jurisdictions.
The Legislative Decree states that the CUP method is the most appropriate TP method for cross-border transactions involving commodities and other products, whose prices are set by reference to commodity prices. These rules establish that the arm’s-length price for Peruvian income tax purposes must be determined by reference to the quoted price on: (i) the shipment date of the commodities exported; or (ii) the date of disembarkation of the commodities imported.
This approach does not appear to be in accordance with the guidance issued in OECD BEPS Action 10, which proposes that the tax administrations take the actual pricing date as a reference to determine the price for the commodity transaction, when “the taxpayer can provide reliable evidence of the actual pricing date agreed by the associated enterprises in the controlled commodity transaction.”
Forthcoming tax regulations are expected to provide additional guidance and clarification as to: (1) the products that will be covered by these new TP rules; (2) the commodity prices and quotes to be considered; (3) the international market, the commodity exchanges or similar markets that may be taken as a reference; and (4) the adjustments that must be accepted to reflect the commodity features and the economically relevant characteristics of the particular transaction.

Intra-group services
Under Peruvian law, legal entities can generally deduct expenses to the extent that they are necessary to produce taxable income or to maintain their source of revenue generation.
Nevertheless, the Legislative Decree introduces an entirely new requirement to deduct intra-group service charges. Specifically, it requires satisfying the “benefit test” to demonstrate that the services were in fact received.
Simply put, it is necessary to examine whether the service provides an actual economic benefit (i.e., commercial or economic value) to the receiving entity. This can be determined by considering whether an independent company in comparable circumstances would have been willing to pay for the activity if performed by an independent company or would have performed the activity in-house for itself.
The arm’s-length charge for the services should be determined based on a fully loaded cost basis, plus a mark-up. For such purpose, the appropriate cost basis relating to the services (e.g., relevant people´s salaries, plus overhead, etc.) and an appropriate margin applicable to costs should be established.
The Legislative Decree provides specific guidance on a particular category of intra-group services, referred to as low value-adding intra-group services. In such cases, the provider of the services must apply a profit mark-up of no more than 5% to the relevant costs incurred in performing the low value-adding services.
Low value-adding intra-group services for purposes of this approach are services performed by one member or more than one member of an MNE group on behalf of one or more other group members. The services must:

  • Be of a supportive nature
  • Not be part of the core business of the MNE group
  • Not require the use of unique and valuable intangibles and must not lead to the creation of unique and valuable intangibles
  • Not involve the assumption or control of substantial risk by the service provider and must not give rise to the creation of significant risk for the service provider

The tax regulations will provide examples of services that would likely meet the definition of low value-added services.

Source: EY